Thursday, April 17, 2008

Health Care for Independent People: Part 1

For anyone who wants to live outside the confines of regular employment, one of the biggest questions is, "What about health insurance?" This question is so big and scary that many resources on early retirement pretend it doesn't exist, or simply say, "You must have health insurance," as though it's a given.

Back in March, I laid out my rough plan for becoming financially independent by sometime in my thirties. I also examined how a potential child could affect my budget. Today, it's time to tackle healthcare.

The traditional solution to post-retirement healthcare is Medicare. There’s a heck of a long time between 35 and whatever-astronomical-age-I’ll-become-eligible-for Medicare, and I'm not overly confident that it will exist in a form like it does today by the time I get there. So for the purposes of this post, Medicare isn't a factor.

The first pillar of my healthcare plan, and one I would recommend to anyone who's planning to live without employer-sponsored health insurance, is to self-insure for routine medical expenses like maintenance prescriptions and annual physicals. The premiums for health insurance that covers these expenses are often astronomical, as we'll see in part two of this series. For many people, it will be far cheaper to pay these routine costs out of pocket.

At my current level of health, I would expect to pay about $1700 annually for health maintenance. This covers my two current prescriptions, which would cost about $105 a month, a yearly physical with blood work and a pap smear, which according to the bill from my doctor would have cost $359 without insurance, and perhaps a second doctor's visit for a straightforward health problem, which would cost about $150. These costs should be built into my baseline post-retirement budget.

I would also plan to "self-insure" (meaning I would pay out of pocket) any healthcare cost under $10,000. This would cover minor but less routine costs like some emergency room visits, extra tests, and minor injuries. I'd put about a third of this in a Health Savings Account, currently capped at $2850 in contributions per year. This account functions like a Roth IRA--money is taxed when you put it in, but is not taxed when you take it out. For long-term savings, this is an excellent deal, since the interest on your savings can far exceed the initial contributions. Unlike a Roth IRA, there are no age limits on when money can be used. Eventually, the HSA would become large enough to contain all of my self-insurance money. For the first few years, I'd put the balance of the $10,000 in a liquid and low-risk investment, like a high-yield savings account.

Even with a large amount of money set aside for self-insurance, major medical events like surgery or cancer can be catastrophic. Cancer treatment can cost $300,000 a year. Young people may get away with not having insurance for short periods of time (I have, and am none the worse for it), but any long-term budget must include some form of health insurance. What are the options for getting health insurance on your own? How much does it cost? We'll start exploring this in Health Care for Independent People: Part 2


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Dana Seilhan said...

It's maddening. I figured out that with a $5000 deductible I could go under $100 a month in premiums, but I'm not on any maintenance meds. And that's not even half of it--where would I come up with an extra $5000 a year if, God forbid, I got sick? It'd wind up being put on a payment plan, I guess. Hospitals at least do that, but I don't know about doctors' offices.

I'm low-income enough to qualify for Medicaid but my experience with them is that they want to save money even more than HMOs do, so chances are good they'd skip over doing something that would have helped me, and who cares anyway because I'm broke. Kind of sad.

julie said...

Having to factor in health care costs makes early retirement much more complicated. We take that for granted in Canada where medical treatment is free for everyone. The only thing we need to consider is extended health coverage for non-essential prescriptions, physiotherapy, etc. I agree with Elizabeth that self-insuring for extended health is the way to go.

Anonymous said...

Are you sure about the HSA?

I have had one for about 2 years now. You actually put the money in pretax, AND withdraw it without tax. No taxes, ever.

It is a pretty good deal, but you have to have a high deductible plan to be eligible. Also, current offerings don't offer much as far as interest rates go and fees seems to be a little high. I imagine if they become more popular the fees will become more competitive.

Anonymous said...

Looking forward to part II.

smarief99 said...

HSAs are not like Roth IRA's - contributions can be made pretax or are tax deductible. As long as they are spent on qualified medical expenses you never pay taxes on them. Contributions grow tax free. If you use them for nonmedical expenses you pay income taxes on them and a 10% penalty. After 65 or if you're disabled money can be withdrawn for non-medical purposes without penalty - but you still pay income taxes. If you use it for medical - it remains tax free.